Good times returning?

10 February 2006

Will 2003 finally bring an end to Europe's IT recession?

IT revenue in Europe

Source: IDC

Most market analysts agree that an upturn is coming, but their forecasts vary about its timing and scale.

Researchers at IDC, for example, believe there will be a slow recovery by the end of 2002, with the real upturn not happening until around mid-2003. Combined European IT revenues in the second and third quarters of 2002 are estimated to be about $70 billion (EU71.4bn), and are forecast to rise by between $5 billion and $10 billion (EU5.1bn-EU10.2bn) in the same period in 2003. Furthermore, IDC expects growth in the European IT sector to be between 6% and 10% a year until 2006, depending on macroeconomic factors.

Gartner is also bullish about 2003. It forecasts that IT spending in Europe will grow by 5.4% in 2003 - more than triple the 1.7% growth rate between 2001 and 2002. The market research company says that software and IT services will grow steadily in 2003 but hardware sales will stay "dead-flat" - and well below pre-crash levels.

But not all analysts are in agreement on the timing of the recovery. US investment bank Merrill Lynch, following a survey of 300 CIOs, says the European IT sector will stay becalmed until early 2004.

IT spending growth in Europe

Source: Gartner

There are a number of possible growth drivers. Tony Picardi, IDC's senior vice president of global software, says businesses will invest in application development and deployment products, which will help them to achieve efficiencies in their business operations. Merrill found that about half of the CIOs that it surveyed planned to replace ageing hardware systems and buy additional products in 2003. The bank also found that one-third of companies had not yet undertaken long-term outsourced IT projects - which, it argues, means there is plenty of scope for growth in the services sector.

But that is for the near future. For now, suppliers of software and IT services continue to have a torrid time. "New license sales for major enterprise applications have all but dried up," says Ovum analyst Judith Jordan. "With precious few new major system implementations on the agenda, systems integrators and IT staff agencies are having an exceptionally tough time," she adds.

Gartner finds greatest optimism among CIOs in the Benelux region, where nearly one-fifth expect their IT budgets to increase by more than 10% in 2003. Just 4.5% of their German counterparts expect similar growth rates.

2003 spending intentions by country: Proportion of businesses planning to increase their IT budget in 2003

Source: Gartner

These sizeable discrepancies are mirrored across different industries. According to Merrill, nearly two-thirds of CIOs in the services sector expect to spend more in 2003. But nearly a third of finance companies surveyed say their IT budgets will be down in 2003, while just over one-third expect their budget to stay unchanged.

Merrill's research also confirms the depressing level of current spending. Not one of the telecommunications companies it surveyed said that they will end up spending more this year than last year, while one-quarter of those in the finance sector also expect to have spent less in 2002.

These assessments underline the continued uphill struggle facing most suppliers of technology in Europe. John Gantz, IDC's chief research officer, warns that the IT industry is fast maturing and that the industry's growth rate will soon decline to about the same growth rate of global GDP - a maximum of a few percentage points a year. However, he adds: "I think we can still double that [growth rate] for a while."

Pockets of spending

Most market research companies believe there will be an upturn in Europe's IT market in 2003, and their analyst units have identified where they believe the growth will come from.

For example, nearly three-quarters of companies intend to buy network and systems management applications over the next six to 12 months, according to an Aberdeen Group survey of senior IT users, as businesses demand that their systems and software run continuously.

Spending on security is also tipped to increase. One-third of companies spent 5% or more of their IT budget on security in 2001, according to Meta Group, and in 2003 that proportion will rise to more than half. "Because of cyber terrorism, CIOs are investing in more protective security software like intrusion detection applications," says analyst Tom Scholtz.

Sales of development tools and deployment software will register the fastest growth in the applications market, says IDC. Having deferred on development projects, companies are looking to invest in application development software, such as XML-enabled tools.

But the struggle in the customer relationship management (CRM) software market will continue for the foreseeable future, according to a Merrill Lynch survey. More than 80% of businesses that do not yet have a CRM system said they had no intention of buying one in 2003. "This segment of the software market was one of the most hyped up and has suffered from being over-sold and unable to deliver on customer expectations," said Merrill.

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